If Middle East countries use lower oil prices as an excuse to neglect development of roads, bridges, and power lines, their bright future could be stymied before it begins.

In the period of a scant few years, the United Arab Emirates (UAE) spent nearly US$300 million on an indoor ski slope in the middle of the desert, $8.5 billion to start construction on the largest airport in the world, and upward of $30 billion on a series of man-made residential and commercial islands in the shape of a palm tree. But while the Gulf states were developing creative architecture that generated buzz around the world, their infrastructure was struggling to keep up — the roads and bridges, the grids and pipelines, the neighborhood upgrades and communications networks. Although the governments of the Gulf Cooperation Council (GCC) invested generously in some of the biggest development projects, their combined infrastructure outlays of $720 billion between 2002 and 2008 fell far short of what the region needed to support economic growth that topped 6 percent in 2008 and burgeoning populations that have grown more than 20 percent in the past decade.

This puts the GCC governments in a thorny position. Just when they most need to focus on infrastructure, oil revenues are falling and global capital markets have dried up. Until recently, European, Asian, and U.S. banks had provided most of the debt financing for government-sponsored or privately backed infrastructure projects in much of the Gulf. In 2007 and 2008, these institutions underwrote more than $48 billion in infrastructure loans. Now, however, banks around the world are becoming more reluctant to support large infrastructure projects, fearful of tying up expensive and elusive capital in efforts that may be delayed or never completed. It doesn’t help that GCC governments, no matter how much they would like to turn their attention to infrastructure, face pressing short-term needs that make it difficult to guarantee loans. Among their priorities: propping up struggling stock markets, meeting IMF financing responsibilities, and bailing out banks and companies whose health is crucial to their countries’ economies — all of which are expensive endeavors, especially when government funds are less plentiful than they were when the oil prices supporting them hovered above $120 a barrel.

Faced with these challenging conditions, GCC governments cannot avoid infrastructure development without giving up on economic development at the same time. Therefore, they must find creative ways to support and fund infrastructure projects. For starters, they could tap into public and private pension funds, which in the Middle East are primarily invested in equities, but tend to be focused on multiyear instruments better aligned with the long-term needs of retirees in other parts of the world. In addition, GCC governments should facilitate debt financing by breaking projects into phases, making them more digestible to the credit markets and accessible to single developers. Recent successful deals in western Europe’s renewable power sector suggest that smaller projects are most likely to obtain financing in the current economic environment. And these governments must do a better job of fostering private-sector investment — particularly an emerging class of regional infrastructure and private equity funds — by putting their full weight behind promises to guarantee loans and by providing incentives for lenders and developers, such as subsidizing part of the interest rate (as high as 7 percent in the region) or covering currency exchange risks.

GCC governments must also make a strong effort to market the region’s positive economic growth prospects in general, and targeted infrastructure projects in particular, to global investors and developers. To do so, they will need to show their own willingness to invest even if there is less money to go around, as Saudi Arabia and the UAE did in 2009, when they dedicated billions more dollars to government expenditures than they had in the previous year. This is the sort of action that builds credibility for these governments as partners in infrastructure development. In addition, such illustrations of government fortitude need to be well publicized throughout the world to demonstrate to international investors and developers that the region is indeed committed to using its accumulated surpluses to advance economic growth.

Fadi Majdalani, Alessandro Borgogna, Walid Fayad, and Tarek El Sayed, “Weather the Storm and Prepare for the Future,” Booz & Company white paper, June 2009: The paper on which this article is based provides in-depth analysis of the best roles for all stakeholders in developing GCC infrastructure.

Articles published in strategy+business do not necessarily represent the views of PwC Strategy& Inc. or any other member firm of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase.